“Cap-and-Trade” and Carbon Tax Proposals

The idea of “cap-and-trade” first emerged in the United States in the 1960s as a device to get the free economy to control pollution, folding in the cost of pollution instead of telling industry how to stop polluting. Often called emission trading, in a working cap-and-trade system, industries that release undesirable compounds into the air, water, or soil have limits of how much they can emit based upon pollution permits. Depending on the system, polluters either are given or have to buy their permits. The government establishes how much total pollution that the permits will grant, an umbrella cap on the economy. If an industry participant wants to release more than the permit allows, they buy the right from another industry player, if available, or perhaps face penalties, depending on the details.

Cap-and-trade can be used to regulate any pollutant, not only carbon dioxide or other greenhouse gases. The U.S. Environmental Protection Agency has three cap-and-trade programs, none of which apply to greenhouse gases. They aim to combat acid rain by reducing sulfur dioxide and nitrous oxide compounds, mostly an issue with coal power.

There is no U.S. cap-and-trade for carbon dioxide, though proposals have been raised regularly, and the U.S. House of Representatives passed an emissions trading program in an energy bill in 2009, but the bill hasn’t been approved by the U.S. Senate, as of June 2011.

Australia has been considering a cap-and-trade program for carbon dioxide, but that too hasn’t been implemented as of June 2011. The European Union has had a carbon emissions trading program since 2005.

CAP-AND-TRADE IN THE UNITED STATES

In the United States, the Acid Rain Program‘s cap-and-trade system has successfully reduced pollution and cost industry far less than expected, at $3 billion per year instead of the feared $25 billion per year, according to a study [that I haven’t found yet] in the Journal of Environmental Management. Savings from cleaner air and water and avoided death and illness are estimated in the range of $100 billion per year, according to the EPA.

However, acid rain chemicals are easier to tame than carbon dioxide. The goal for the subjects of U.S. regulations today – nitrous oxide and sulfur dioxide – is as little as possible. Everyone agrees that these pollutants are bad for the environment and people, and there was a commercially-available solution for nitrous oxides and sulfur dioxide emissions when the cap-and-trade system began in 1990: scrubbers on the smokestacks. Even though the U.S. Congress could have ordered industry to buy the scrubbers, it was easier to pass cap-and-trade politically, and only a certain sector of energy production emits a significant volume of these chemicals. Today, there isn’t consensus about the effects of carbon dioxide gas, which isn’t toxic to humans. There isn’t consensus about how much carbon emissions is acceptable, and there is no viable carbon capture technology. And more than 80 percent (by volume) of energy production methods still produce carbon dioxide, whether that’s from biofuels or coal.

CAP-AND-TRADE IN EUROPE

In 2005, the European Union passed its own cap-and-trade program to limit carbon dioxide emissions, applied to more than 12,000 factories and power plants in 29 countries. The program includes some limits to nitrous oxide, and airlines will be obliged to participate by 2012. The carbon “cap” on total emissions decreases 1.74% per year.

Some regulators have already claimed success, as the carbon dioxide emissions were reduced in 2009; they increased again a little in 2010. However, the EU admits it gave out too many permits and that future permits will need to be tighter. Furthermore, the recession has acted as a major factor in lowered emissions, and European industries haven’t needed to make any technological changes because of lower demand.

“Power companies were given free carbon permits, but they raised electricity fees anyway — as if they had paid the market price for their permits — and pocketed the markup. Many companies were allocated too many allowances, often the result of powerful industries lobbying the governments that give the permits,” Arthur Max of The Associated Press wrote from Belgium in a 2011 story about the Europeans’ progress.

If the EU’s carbon dioxide emissions will be reduced in coming years has yet to be determined since the real effects of the cap haven’t truly set in.

CAP-AND-TRADE IN INDIVIDUAL STATES

Ten states in the Northeast have applied a cap-and-trade system to carbon dioxide as of 2008, in the Regional Greenhouse Gas Initiative, with the goal of reducing greenhouse gas 10 percent by 2018.

California is planning its own cap-and-trade program, slated to begin December 2011. Ten Canadian provinces and Western U.S. states and have joined California in the Western Climate Initiative, with the hope that there will be a regional cap-and-trade program too.

CARBON TAX

Carbon taxes are another way to integrate emissions reductions into the economy. The taxes makes a beeline for fossil fuels, which are far and away the main source of carbon dioxide emissions, whether they’re burned in vehicles or for electricity. A carbon tax on fuels raises the overall price, in theory reducing our ability to buy too much. That means that industries or individuals can still produce as much carbon dioxide as they please, but they’ll have to pay for it.

Some economists prefer carbon taxes, as they are simpler to enforce, particularly internationally, and there’s likely to be less dramatic shifts in pricing. Others prefer cap-and-trade because there’s a finite ceiling to emissions. Many other arguments support either measure.

From a carbon tax perspective, diesel fuel and natural gas have an advantage over gasoline and coal, respectively, since they produce less carbon dioxide for the energy they generate. Of course, solar and wind produce none, but biofuels are more complex. Many carbon taxes in effect exclude biofuels like wood waste, even though they produce carbon dioxide.

Several European countries and individual U.S. states have various carbon taxes, applied from anywhere in the range of cents to close to $100 per ton, about as much carbon dioxide as would be emitted from using roughly 103 gallons of gasoline. These taxes are still low enough that they aren’t halting emissions. (For more details about calculating carbon emissions, seeThe Intergovernmental Panel on Climate Change.)

In the United States, carbon taxes in individual states are currently insignificant compared to other market pressures on the price of fuels, particularly in the case of petroleum.